How Riskily Do I Invest? The Role of Risk Attitudes, Risk Perceptions, and Overconfidence

Our study analyzes the determinants of investors’ risk taking behavior. We find that investors’ risk taking behavior is affected by their subjective risk attitude in the financial domain and by the risk and return of an investment alternative. Our results also suggest that, consistent with previous findings in the literature, objective or historical return and volatility of a stock are not as good predictors of risk taking behavior as are subjective risk and return measures. Moreover, we illustrate that overconfidence, or more precisely miscalibration, has an impact on risk behavior as predicted by theoretical models. However, our results regarding the effect of various determinants on risk taking behavior heavily depend on the content domain in which the respective determinant is elicited. We interpret this as an indication for an extended content domain specificity. In particular with regard to the Markets of Financial Instruments Directive (MiFID), we believe practitioners could improve on their investment advising process by incorporating some of the determinants that, by our argument, influence investment behavior.